Seventh Circuit agrees with FTC that size doesn't matter

The Seventh Circuit Court of Appeals recently reversed the first federal district court decision to allow a claim for violating of section 2(e) of the Robinson-Patman Act based on discrimination in package size, holding that a difference in package size alone is insufficient.

Agreeing with the position of the Federal Trade Commission (“FTC”), the Seventh Circuit Court of Appeals recently reversed the first federal district court decision to allow a claim for violating the prohibition of section 2(e) of the Robinson-Patman Act against discrimination in the provision of promotional services to customers based on discrimination with respect to package size. The district court had denied a motion to dismiss a complaint filed against Clorox by Woodman’s Food Market, a regional chain of 15 grocery stores, alleging that Clorox violated section 2(e) by refusing to sell Woodman’s the same large packs of products that Clorox sold to certain “big box” stores. [1]

The FTC had filed an amicus brief disagreeing with the district court’s decision and clarifying the FTC’s position regarding discrimination based on special packaging or package sizes. The FTC argued unequivocally that, to trigger section 2(e), a seller must offer a special package size primarily to convey a promotional message, not simply to meet demand from retailers or consumers for desirable product attributes or a lower per unit price. As the FTC concluded, “[p]roperly understood, Section 2(e) does not generally require manufacturers to sell the same package sizes to all buyers who demand them; instead, it prohibits discrimination only in genuinely promotional services or facilities distinct from the product itself.” The FTC justified this narrow reading of Section 2(e) by the fact that, unlike Section 2(a), which prohibits only price discrimination that injures competition, Section 2(e) requires no evidence of competitive injury for a violation.

The Seventh Circuit emphasized this difference between Sections 2(a) and 2(e) in rejecting Woodman’s argument that Clorox’s refusal to sell it larger package sizes discriminated against it by giving the big box stores a lower per unit price. The court noted that it had in previous cases rejected the theory that acts prohibited by Section 2(a) could also be prohibited by section 2(e) because that would allow the avoidance of section 2(a)’s lessening of competition requirement in every case that could fit the criteria of both sections.[2] The Seventh Circuit thus concluded that, to the extent Clorox’s bulk packaging constituted a quantity discount, it must be analyzed under Section 2(a) instead of Section 2(e).

Turning to Woodman’s other argument—that the convenience of bulk packaging is a “service or facility” within the meaning of Section 2(e)—the Seventh Circuit noted that every other circuit to consider the issue had held that the terms “services or facilities” in Section 2(e) are limited to attributes “connected with promoting the product” and do not include every attribute that simply makes the product more desirable to consumers. It also pointed to two of its own previous decisions that were consistent with this limitation. [3] The Seventh Circuit emphasized the FTC’s position that package size alone is not a promotional service or facility, which the court said deserved its “respectful consideration.” The court specifically cited to the FTC’s longstanding Fred Meyer Guides,[4] the current version of which states that Section 2(e) prohibits only promotional services or facilities—namely, those “used primarily to promote the resale” of the manufacturer’s product to the consumer, not from the manufacturer to the retailer. [5]

The Seventh Circuit found logic in the FTC’s position that larger package size could not be a promotional service or facility merely because it provided convenience that made it more attractive to consumers. As the court explained:

If any product attribute that made the product more desirable automatically became a promotional "service or facility" by virtue of that fact, then subsection 13(e) would cover all products. This would undermine the balance that Congress has struck between subsection 13(a)’s broad prohibition (which is limited by the need to show harm to competition) and subsection 13(e)'s narrow but categorical prohibition. Moreover, such an interpretation of subsection 13(e) would wipe out the seller's discretion to choose which products to sell to whom.

Finally, the Seventh Circuit addressed Woodman’s reliance on two old FTC administrative decisions that had found a violation based on the reasoning that different sized packaging could by itself stimulate public demand, and a retailer who was denied certain package sizes might lose sales and customers. [6] Noting that the FTC had expressly repudiated those cases in light of intervening Supreme Court decisions and developments in antitrust policy, the Seventh Circuit found them to no longer be good law.

Although the Seventh Circuit refused to rule out the possibility that package size could be a service or facility if combined with other promotional content, it found that was not the case as to the larger package sizes of which Woodman’s was complaining. The court concluded that, because any quantity discount created by larger package size must be analyzed under Section 2(a) and the mere convenience of larger package size could not be a promotional service or facility, Woodman’s was left without a leg to stand on.

Given the Seventh Circuit’s affirmation of the FTC’s position regarding package size, sellers may in most cases safely discriminate between customers based on packaging that is merely larger and does not constitute any promotional message. However, there remains some danger of a Section 2(a) violation when the package size lowers the per unit price significantly under circumstances that threaten to lessen competition. In addition, there may be types of packaging that could be considered a promotional service. In that regard, the following examples offered by the FTC in its amicus brief are instructive as to packaging that could violate Section 2(e) if not offered to all customers:

During the Halloween season, offering multi-packs of individually wrapped candy bars in Halloween-themed packaging, the primary purpose of which would be to promote resale based on the premise that the themed packaging would promote sales to consumers during the Halloween season.

Providing retailers with “sample size” versions of a product to give away to customers, the primary purpose of which would be to advertise the products while relieving retailers of the cost of opening standard size packages and dividing their contents to give away as samples.

During football season, offering retailers chocolates in large, football-shaped packages featuring statements like “Super Bowl Size” or “Official Chocolate of the National Football League.”

See Woodman’s Food Market, Inc. v. The Clorox Co., 2015 U.S. Dist. LEXIS 11656 (W.D. WI, February 2, 2015). The District Court subsequently granted Clorox the right to an interlocutory appeal, and the United States Court of Appeals for the Seventh Circuit agreed to hear the appeal. [Back to reference]

The FTC’s Fred Meyer Guides, originally published in 1969 and last updated in 2014, are an effort by the FTC to assist business in complying with Sections 2(d) and 2(e) of the Robinson-Patman Act. [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.